WEALTHCO. ASSET MANAGEMENT
FOURTH QUARTER 2019
Taking the long view
2019 was a great year for public markets. A traditional balanced portfolio of 60% stocks and 40% bonds returned around 15% last year; which was the best year since 2009 when the same allocation would have earned you more than 20%. Two stunning years for public markets, but behind the massive returns there was a lot of volatility. Both 2009 and 2019 were rebound years following significant market turmoil. In 2008, the global financial crisis pushed many countries into a recession; whereas in 2018, slowing economic growth and trade tensions caused a major market correction.
The year-to-year volatility in public markets makes it difficult to look at returns over shorter time frames. Instead it is better to look at returns over market cycles, and longer timeframes that are more consistent with your retirement objectives. This way you get the whole story, not just one chapter in your lifetime of investing.
Case in point: the same traditional 60/40 portfolio has returned around 5.2% annualized over the last five and a half years, and two years were negative. Putting things in perspective, the last five years were strong bull markets for stocks and bonds. So, 15% in 2019 was truly a significant deviation from the long-term average.
Diversification pays off in down markets
The WealthCo balanced portfolio has generated a ~6.9% annualized return over the past five and a half years (before management fees); but, in contrast to the traditional 60/40 model, our client portfolios have never had a negative year. This is a direct reflection of our investment philosophy: we attempt to reduce volatility in client portfolios by diversifying beyond just stocks and bonds and using alternative asset classes. Over the long-run, managing money with this philosophy tends to underperform when public markets are up, and outperform when public markets are down. For WealthCo clients this was most evident in 2015 and 2018 when public markets turned negative and our funds made positive mid-single digit returns; and in 2019, when public markets significantly outperformed.
Fourth Quarter Highlights
The Potomac Shores LP made a large distribution in Q4 following the sale of developed single-family lots near Washington, Virginia. The partnership has acquired all remaining lots, and final distributions will be made following the final sales. This investment is on track to generate a rate of return in the high teens for the Alternative Income fund.
Phase 1 of the Spartan Ridge Industrial project in Spartanburg, South Carolina was sold in Q4. With the proceeds from sale we invested in Spartan Ridge Phase 2 and the ICM Mexico Real Estate Opportunities LP – our first international real estate equity investment.
The Trez Capital US Opportunity #2 LP made a significant distribution to its limited partners following the completion and sale of the Winding Creek garden apartment project in Grande Prairie, Texas. The WealthCo funds also had direct exposure to this project through a mezzanine debt investment made in the Alternative Income Fund. Some of the proceeds were reinvested in the Trez Capital US Opportunity #5 LP.
The Tsawwassen Partnership reduced its fair value estimate for the Tsawwassen Commons retail real estate project in Q4. The project faced several challenges including weak big-box retail real estate markets, slow lease-up, and construction delays on future phases. The partnership is now exploring recapitalization or sale.
Keep long-term goals in mind
In retirement, most people plan to live off their pension investments, which means taking regular withdrawals to generate income. The main problem with traditional 60/40 portfolios is that market volatility in retirement could mean losing years of hard-earned savings, particularly if you withdraw a large sum when prices are low. Now, the number one way to mitigate this risk is to diversify your portfolio; and the number one way to diversify is by adding different asset classes. This is why, with our client’s long-term goals in mind, we invest a large portion of our clients’ assets in alternative asset classes, in addition to traditional public stocks and bonds. It is because of this we have been able to mitigate that volatility which is so undesirable as you approach retirement. So, when you’re looking at your 2019 investment returns, remember to keep them in context of your longer-term investment objectives – and try to see past the year-to-year volatility.
The results speak for themselves.
INCLUSION + OPPORTUNITY
DOWNLOAD THE WEALTHCO ASSET MANAGEMENT Q4 2019 FUND FACT, AND SEE HOW EQUAL OPPORTUNITY CAN HELP YOU REACH YOUR GOALS AND OBJECTIVES FOR THE FUTURE.